Pound Sterling dips amid increased speculation for BoE rate cuts

• The Pound Sterling falls against the US Dollar as BoE rate-cut bets surge.
• Weak UK Retail Sales lift bets supporting BoE rate cuts in August.
• Investors await the preliminary US/UK S&P Global PMI data for July.

The Pound Sterling (GBP) continues to hold the key support level of 1.2900 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair edges down but remains inside the tight range of 1.2900-1.2940 as the recovery move in the US Dollar (USD), driven by growing speculation of Donald Trump winning the United States (US) presidential elections in November, appears to have stalled with focus on a slew of economic data this week. 

The US Dollar Index (DXY), which tracks the Greenback’s value, against six major currencies, hovers near 104.30.

This week, investors will focus on the US preliminary S&P Global Purchasing Managers Index (PMI) for July, Q2 Gross Domestic Product (GDP), and Durable Goods Orders and Personal Consumption Expenditures Price Index (PCE) data for June. The economic data could provide fresh cues about when the US Federal Reserve (Fed) will start reducing interest rates this year.

Economists expect the Manufacturing PMI, scheduled on Wednesday, to have expanded at a nominal pace to 51.7 from June’s reading of 51.6. The Services PMI, a measure of activities in the service sector, is estimated to have expanded at a slower pace to 54.4 from the prior release of 55.3.

According to the CME FedWatch tool, 30-day Federal Fund futures show the central bank beginning to lower its key borrowing rates from their current levels in the September meeting. The Fed is also expected to cut interest rates again in November or December.

Daily digest market movers: Pound Sterling drops against its major peers

• The Pound Sterling weakens against its major peers, except the Australian Dollar (AUD) and the New Zealand Dollar (NZD) amid improved speculation that the Bank of England (BoE) will start cutting its key interest rates from the August meeting. Asia-Pacific currencies have been beaten hard due to their strong linkage with China’s economic outlook. Investors have raised concerns over the economic outlook of the world’s second-largest nation due to weaker-than-expected Q2 Gross Domestic Product (GDP) growth.
• The expectations for the BoE to pivot to policy normalization increase as higher interest rates have narrowed pockets of individuals. The recent UK Retail Sales report for June showed that receipts at retail stores unexpectedly contracted by 0.2% year-over-year, which were expected to have grown at a similar pace. Monthly Retail Sales declined at a faster-than-expected pace by 1.2%. 
• Meanwhile, expected deceleration in Average Earnings, a key measure of wage growth momentum that prompts inflation in the service sector, has also boosted expectations of BoE rate cuts. Though the wage growth measure has slowed, as expected, in three months ending in May, it is still higher than what needs to be consistent to propel officials’ confidence for rate cuts.
• Going forward, the major trigger for the Pound Sterling will be the UK preliminary S&P Global/CIPS PMI data for July, which will be published on Wednesday. The report is expected to show that the Manufacturing PMI expanded at a faster pace of 51.1 from the former release of 50.9. The Composite PMI is estimated to have increased to 52.6 from 52.3 in May.

Technical Analysis: Pound Sterling hovers near 1.2900 

The Pound Sterling oscillates in a tight range above the round-level support of 1.2900 against the US Dollar. The GBP/USD pair weakened after facing a sell-off from a fresh annual high of 1.3044 last Wednesday. 

The upward-sloping 20-day Exponential Moving Average (EMA) near 1.2860 suggests that the uptrend is intact. The 14-day Relative Strength Index (RSI) declines after turning slightly overbought and is expected to find a cushion near 60.00.

On the upside, a two-year high near 1.3140 will be a key resistance zone for the Cable. On the other hand, the March 8 high near 1.2900 will be a key support for the Pound Sterling bull.